Merck May Not See Earnings Growth Until 2009

Peter Kang, 09.07.05, 3:53 PM ET
Forbes.com

Bear Stearns initiated coverage on Merck (nyse: MRK - news - people ) with a "peer perform" rating and said the drug firm's abundant cash hoards should support plans for long-term growth as well as the attractive 5% dividend yield.

However, legal liabilities will likely hinder upside in the shares, the firm said. "Lack of earnings growth until 2009, a below-average (although improving) pipeline score, and an overhang from ongoing Vioxx litigation will keep a lid on the stock, in our opinion," said Bear Stearns.

Possible near-term catalysts for the stock, according to Bear Stearns, include the uptake of cholesterol drug Vytorin, the potential launch of Pargluva with partner Bristol-Myers Squibb (nyse: BMY - news - people ) and Merck's analyst meeting in December.

"However, we see only limited upside to the stock, since earnings growth is not expected to resume for Merck until 2009 and the litigation news flow on Vioxx in the near term will be a major overhang," said Bear Stearns, particularly since the first Vioxx trial last month resulted in a plaintiff award of more than $250 million. The firm noted it expects the award be overturned on appeal.

Bear Stearns is looking for Chief Executive Richard Clarke to outline a long-term growth plan at the company's annual analyst meeting. "We expect Merck's new CEO to focus the company's R&D resources on a narrower spectrum of therapeutic areas that offer the best risk/reward for creating long-term shareholder value," it said. "In addition, we anticipate a more focused in-licensing effort aligned with its defined therapeutic footprint."

The research firm said Merck's "appealing dividend yield looks sturdy" while an ample amount of cash should aid its growth prospects. "Merck is committed to financing its appealing 5.3% dividend yield through its attractive free cash flow," it said. "Merck's abundant free cash flow, coupled with $15 billion in repatriated earnings, provide Merck's energized and engaged CEO with ample ammunition to acquire long-term growth."